Working from home has significantly reduced the need for office space – or so you would think. Construction companies are still investing significantly in office space. Here we look at why.
Statistics
Government statistics show that the summer period saw record-high spending on office development. The increase was unexpected because work-from-home trends have sharply declined the demand for office space, driving office vacancy rates to levels not seen since the Great Recession. The work-from-home movement has reduced businesses’ need for office space, but they are investing record sums of money in office buildings. The Census Bureau announced this week that the amount spent on building offices in August reached a record high of $99.4 billion.
Reasons for Ongoing Office Construction
Rise in Cost
One key factor contributing to the increase in spending is labour and materials are becoming more expensive. The data from the Census Bureau are not adjusted for inflation, and according to CBRE’s internal building cost model, costs are increasing three times faster than they did in 2018. This means that significant investment in office spaces could reflect the prices involved in the projects rather than the quantity of projects, as the construction cost has never been higher.
Delays
Due to severe shortages of building supplies during the pandemic, several projects experienced even more delays. Beyond only financial worth, there is a real decline in construction by many criteria. For instance, according to statistics from Colliers, 45% fewer square footage is under development in the second quarter compared to the peak of office buildings in late 2019. Construction projects take a long time and will continue until they are finished because many of them were started before some of the difficulties facing the office market began.
Renovations
A large number of the construction projects that are underway now are renovations rather than brand-new structures. Some businesses are attempting to get remote workers to return by making the workplace feel more like home. This could include food services, an impressive lobby, gyms and outdoor space—small details that make an office building an attraction rather than a requirement.
Interestingly, in contrast to their more basic counterparts, the most luxurious offices in the greatest locations—referred to as “Class A” in the language of commercial real estate—have seen the largest losses in property prices. Class A buildings saw a 35% decrease in sales in 2023 compared to a 9% decrease for Class B properties. Nevertheless, modernising their area is what a lot of businesses believe is best.
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